Accrual & Cash-Based Accounting

Accrual Accounting records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.

Cash-Based Accounting recognizes revenues and expenses only when the cash is actually received or paid.

It should be easy to see that Accrual is the right way to do accounting.

Example

Let’s say that the customer made a $120 purchase in March but would not go live (services rendered) until April.

This is how the statements would change at the time of purchase in Accrual:

• Balance Sheet: Deferred Revenue + $120, Cash + $120
• Income Statement: Unchanged

Here is how they would look in Cash Based:

• Balance Sheet: Cash + $120, Retained Earnings + $120
• Income Statement: Revenue + $120

In essence, the difference between these two are that Cash Based recognizes line items when they are paid for / paid and Accrual recognizes line items when services were actually rendered / costs used.

Almost everything you work with ever is going to be accrual, but it’s important to know the difference between the two regardless.